Top lenders pull plug on small biz loans
Several of the SBA's most active lenders have sharply reduced their loan volume. Will new government programs get them back into the lending market?
NEW YORK (CNNMoney.com) -- At a time when small business owners desperately need loans and credit lines to help them weather the recession, some of the industry's most active lenders have bolted shut the doors to their vaults.
Temecula Valley Bancorp (TMCV) and Capital One Bank (COF, Fortune 500) have stopped taking applications for new loans through the Small Business Administration's flagship 7(a) loan program, and Bank of America (BAC, Fortune 500) has slowed its lending volume to a trickle. Small Business Loan Source, a non-bank SBA lender that specialized in commercial real estate financing, is closed to new applications and leaving all new SBA lending activity to its parent company, First Bank in Clayton, Mo.
These four institutions were among the 30 largest SBA lenders in the 2008 fiscal year, accounting for 4% of the program's loan volume, or $524 million of the $12.8 billion that was lent to nearly 70,000 businesses, according to data compiled by Coleman Publishing, which monitors small business lending trends.
Their sudden absence from the lending scene has left a hole that the banks continuing to participate in the program have not filled in. If current lending trends continue, only two of the top 30 lenders are projected to increase their loan volume this year, according to Bob Coleman, the head of Coleman Publishing.
The sharp drop-off was apparent in the SBA's loan data for the last three months of 2008: The number of loans funded through the agency's 7(a) program fell from more than 20,000 a year earlier to fewer than 9,000. The total dollar value of all the loans funded fell 40%, from $3.2 billion at the end of 2007 to $1.9 billion last quarter.
In a speech last week, President Barack Obama said that the total volume of small business loans backed by the SBA this year is trending below $10 billion, down from $18.2 billion last year and more than $20 billion the year before that.
The government is scrambling to address the problems that led to the abrupt freeze in credit availability. The Small Business Administration last week implemented two new measures authorized by last month's stimulus bill. For the rest of the calendar year, it will waive the fees it charges for participation in its loan-guarantee programs and increase to up to 90% the percentage of each loan that it will insure against default.
However, those moves will only pay off for small business off if banks play ball and resume lending. Coleman, for one, is dubious that will be enough to reverse the lending decline. The banks face other obstacles with SBA loans that are also preventing them from catering to the small business community, he said.
"Regulators are demanding that banks put more into their reserves right now. The SBA is being nitpicky with the defaulted loans, and lenders are finding it more difficult to get paid the government guarantee," he said.
One community banker took that view straight to President Obama last week. At a town hall meeting in Costa Mesa, Calif., Joan Earhart, the SBA manager for Fullerton Community Bank, asked Obama to set a new bar for regulators that recognizes the trouble small businesses are having meeting strict underwriting criteria.
"When we make loans that are less than the normal quality, even with the SBA guarantee, the regulators tend to criticize us. And when they criticize us, they make us set aside reserves as if the loan is going to be bad, and that eats into our capital. That's part of the problem that banks are having right now," she said. "We want to make SBA loans, but we don't want to get our hands slapped by the regulators when we try to help these people."
Banks are also struggling with a frozen secondary market, but on that front, the government's actions may be successful in engineering quick relief.
Many banks that make SBA loans then resell bundles of the loans to private investors. Since this fall, that market has been almost nonexistent as investors, burned by toxic mortgage bundles, shy away from such investments. Treasury Secretary Geithner said last week that his department will spend up to $15 billion buying small business loan bundles directly from banks. That initiative will begin by the end of the month, Geithner said.
Temecula Valley Bank, based in Temecula, Calif., ranked eighth Coleman's list of the top 2008 lenders, with a total loan volume exceeding $197 million for the year. CEO Frank Basirico says his bank ceased its SBA loan program in January because of the frozen secondary market and because of the bank's plan to shrink its loan portfolio, a strategic move fueled by a poor liquidity situation.
But that doesn't mean the bank is shunning all small businesses - just those seeking SBA loans. Since opting out of the SBA program, Temecula has continued to lend directly to some qualifying businesses, Basirico said, without relying on the SBA's guarantee.
"We're looking to support the local businesses where our bank has a branch," he says. "That's why we pulled back from the SBA presence - it's important to support the local businesses."
Bank of America pulled back sharply on its SBA lending as default rates for those loans began climbing - in October, CEO Ken Lewis called that loan portfolio a "damn disaster." After making $136.1 billion in SBA loans in the 2008 fiscal year, Bank of America originated just $3.3 million last quarter, according to Coleman's data.
Representatives of Bank of America and Capital One say their banks are still active in other small business lending channels, including credit cards, credit lines, and loans not backed by the SBA. While Small Business Loan Source is no longer taking applications for SBA loans, its parent company, First Bank, says it plans to increase its SBA lending in target locales, including California, Mississippi, Illinois, Texas and Florida.
But even outside the SBA program, business owners say credit availability from banks is almost nonexistent. The Federal Reserve's quarterly survey of bank loan officers has found credit for small business growing significantly tighter - and more expensive - every quarter since the recession began.
Even with higher guarantees from the SBA, many small businesses are risky borrowers. The SBA estimates that 10% of its loans went into default last year.
"Right now these loans aren't profitable," Coleman said. "The stimulus hasn't taken effect, and it's still months away from helping lenders. Some lenders don't think it'll be effective - they don't think it will be strong enough by itself, that the economy also needs to turn around."
With a sigh, he added: "I guess that's where you get the chicken-and-the-egg thing."
At Temecula Valley Bank, Basirico says he's willing to take a look at the rescue programs government has on offer and reconsider his bank's small business lending slowdown if there's signs the loans will become less risky.
"If the Treasury starts buying loans in the secondary market on a direct basis, that will start to free up liquidity," he said. "This administration has to do something to support the SBA, because it's the small business arena that will get us out of the recession. In my opinion, I have to be optimistic and encouraged by what should take place in the next 90 to 100 days."To write a note to the editor about this article, click here.